Yu Lin Foo
Biodiversity in Impact Investing: Developing a Biodiversity-friendly and Nature-positive Portfolio
By Yu Lin Foo | 28 September 2022
From the first international climate treaty (the UNFCCC) in 1992 to the surge in mandating climate-related financial disclosures over the past year, the world and the finance industry have taken many years – decades even – to begin to address the climate crisis. Now, the conversation in sustainable finance has begun to shift beyond the “carbon tunnel vision” to look at biodiversity and nature through emerging frameworks as explored in our previous blog. However, humanity does not have the luxury of time to start tackling biodiversity loss. In Southeast Asia, up to 42% of all species could be lost by the end of this century, around which half are global extinctions. From an economic viewpoint, 63% of GDP in the Asia Pacific region is at risk due to nature loss.
Unpacking the nature of things
Biodiversity, or biological diversity, is defined by the Convention on Biological Diversity (CBD) as
“the variability among living organisms from all sources including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems.”
In other words, it refers to all the organisms in the natural world. Biodiversity is vital to healthy and functioning ecosystems through various roles such as soil fertilization, nutrient recycling, pollination, and pest and disease control. Hence, biodiversity is instrumental for resilient ecosystems and fundamental to our survival. Biodiversity loss presents various direct and indirect risks to businesses that rely on such services – i.e. businesses with dependencies on nature. On the other hand, businesses create impacts on nature and generally contribute to major drivers of biodiversity loss.
Framing biodiversity for financial decision-making
How can investors account for and incorporate biodiversity into their portfolios? The alphabet soup of existing frameworks and tools may be confusing to investors who are starting to evaluate their biodiversity impact. The essence of developing a biodiversity strategy boils down to the classic “mitigation hierarchy” (Figure 1).
Figure 1: The mitigation hierarchy to prevent and reduce biodiversity loss
Although this hierarchy is more often used by project developers, the concept is also relevant to investors working towards a “No Net Loss” biodiversity strategy. It delivers a key message to investors: biodiversity offsets and compensation should be viewed as the last resort as compared to identifying, preventing, and mitigating biodiversity risks and impacts in a portfolio.
How then should investors measure and mitigate their impact on biodiversity? Figure 2 provides a snapshot of various frameworks that provide approaches to understand, define and measure biodiversity impacts and risks.
Figure 2: Frameworks for measuring biodiversity risks and impacts in a portfolio
Purpose 1: Identifying links to biodiversity and risks
Frameworks such as the Capitals Coalition’s Natural Capital Protocol and the TNFD framework and ENCORE help investors understand their biodiversity and nature-related financial risks. Some of the largest standards such as the GRI and CDP have also included sections dedicated to biodiversity-related disclosures.
Purpose 2: Quantifying impact on biodiversity
The Global Impact Investing Network’s IRIS+ system has recently included Biodiversity Footprint as one of the core metrics for measuring biodiversity-related impact. The most common underlying metrics used by different tools to calculate an organization’s footprint include:
Mean Species Abundance (MSA): a measure of the local biodiversity intactness that looks at the composition (e.g. average abundance, richness or geographic extent) of species compared to the expected condition in a pristine site
Potentially Disappeared Fraction (PDF): the rate of species loss or extinction rate in an area due to drivers such as land degradation and conversion, pollution or climate change
On the other hand, a useful tool for measuring positive impact is the IUCN’s Species Threat Abatement and Recovery (STAR) metric, which measures an investment’s potential contribution to reducing species' risk of extinction through threat abatement or habitat restoration.
Challenges and opportunities
As compared to the singular metric of carbon emissions for mitigating climate change, biodiversity measurement is a complicated topic; there is currently a lack of a standardized valuation or measurement approach, with a variety of metrics adopted. Biodiversity outcomes are site-specific and vary between sectors, geographies and impact drivers. There have been some efforts in addressing this issue, such as the Capitals Coalition’s Biodiversity Guidance to the Natural Capital Protocol, which seeks to help businesses better incorporate biodiversity outcomes and value into decision-making. Some countries have also developed indicators for measuring biodiversity, such as the indicator framework developed by the UK government’s Department for Environment Food & Rural Affairs (DEFRA). Another initiative is the EU’s Align project (Aligning Biodiversity Measures for Business Collaboration) which is developing a set of recommendations to standardize biodiversity measurement and disclosure approaches among corporates.
A further challenge is that measuring a company’s biodiversity impact in terms of technical metrics such as species richness requires the help of external experts, resources and tools for data collection, which can be quite costly at this moment. This poses a challenge for investors to request such data from portfolio companies. However, emerging conservation technology solutions as explored in this blog provide an opportunity to potentially reduce the costs associated with biodiversity measurement. Moreover, there is a compelling case to work with local communities and obtain crowdsourced data for a more inclusive community-driven monitoring approach.
Biodiversity measurement in the investment community is still in its infancy but is rapidly gaining traction. Advancing the state of biodiversity measurement in the financial sector requires greater collaboration among scientific experts, standard setters, and investors. Stronger communication and engagement are key to promoting alignment among ecosystem science-based metrics, global biodiversity targets, and impact and financial frameworks for decision-making.
Although it is crucial and foundational for investors to adopt a ‘no net loss’ strategy, this approach is insufficient to reverse the Anthropocene extinction we see today. Instead, the conversation needs to shift towards building “biodiversity positive” or “nature positive” portfolios as we enter the final countdown for biodiversity.